Will I Be Banned from Running a Company If I Declare Insolvency?
If your company is struggling financially and facing the threat of insolvency, there are countless different options and outcomes that you, as a director, could consider, including a Company Voluntary Arrangement (CVA) or a Members’ Voluntary Arrangement (MVA).
Insolvency is a serious process and, as the director of a company, your actions will be judged in light of the events and business practices that have resulted in a negative financial situation. One scenario you might be worried about is the chance of being dismissed, banned or disqualified from running a company in the future if you declare insolvency now.
Every case of insolvency has different circumstances, but few directors are ever outright banned as a result. It’s good to know where you stand though, so in this article we ask our insolvency practitioners for their expert opinions on the situation.
What Is Insolvency?
Let’s start with the basics.
Insolvency is a state that occurs when a company can no longer pay its debts, or when it has more liabilities than assets. Insolvency doesn’t necessarily have to lead to liquidation, as there are ways out of financial difficulties for the company. It’s important to note that you should always contact an insolvency practitioner if your company is in danger of going into the red.
Insolvency can be complicated and there are many different avenues you can take before your company becomes totally insolvent and is dissolved. For example, you can enter into a Company Voluntary Arrangement, or CVA, to give the business time to recover its debts, or the shareholders can agree to voluntarily wind up operations through a Members’ Voluntary Liquidation, or MVL.
If you’re the director of a company, you have a personal responsibility to ensure that your business does all it can to avoid insolvency and liquidation. Not doing so can result in problems for you, personally, if your company has to go down that route.
Does Insolvency Mean Automatic Disqualification as a Director?
The first thing for directors to know is that declaring insolvency doesn’t result in any sort of automatic ban or disqualification from being a company director or from running a business, now or in the future.
In fact, the vast majority of directors are often required to carry on directing the company through the insolvency process. The director is still responsible for many aspects of the company, unless it’s taken under administration or is completely liquidated.
It’s only if a director fails to meet their legal responsibilities when running a company, that they can face disqualification. If that happens, the director can be subject to the Company Directors Disqualification Act or CDDA, which is enforced by the UK’s Insolvency Service. Only then will they banned from being a director or running a company.
What Is the Company Directors Disqualification Act?
The Company Directors Disqualification Act, or CDDA, is a law that allows the government to ban company directors it sees as ‘unfit’ from running companies, now and for a set number of years (usually up to 15 years).
While this sounds harsh, directors must first be investigated by the Insolvency Service. This can happen if someone makes an accusation against a director when the company goes into liquidation, and blames the director for the company’s failures. Aside from a direct complaint, the Insolvency Service may choose to investigate company directors if they have reason to believe the business was being run illegally or simply being run particularly badly.
That means there’s no automatic ban and all directors must undergo a thorough investigation before having to fight their case in the courts. The government must prove that the company director was ‘unfit’ and that their actions (or lack of actions) led to liquidation. For this reason, it’s important that a company director tries their hardest to find alternatives to liquidation.
Read more: Advice to directors
This particular legal recourse can only be enforced on the director of a company that has undergone insolvency and is being liquidised. For this reason, it’s important to consider taking on a CVA before declaring insolvency.
A CVA will help the company to avoid any investigation of conduct and give the business time to pay its debts and get back on top of its finances. This option should always be the first consideration if liquidation can be avoided.
What Are the Grounds for Being Declared ‘Unfit’?
Before a director can be declared ‘unfit’ under the CDDA, their accusers will need to prove that they have met at least one of a stringent set of criteria. The director has to be proven to have acted negligently, illegally, or extremely incompetently before they can be disqualified.
To be disqualified, a company director will have to have done one of the following:
- Failed to keep company accounts or failed to have submitted company accounts
- Failed to complete tax returns or to pay tax owed
- Allowed the company to continue trading when it has entered insolvency
- Used company assets or finances for personal gain or benefit
- Failed to comply with competition laws when trading
- Committed fraud
- Acted as a company director whilst bankrupt
If the Insolvency Service can prove a company director has acted in an ‘unfit’ manner while the company has been trading, then the director can be disqualified. The service will need to prove that the unfit actions of the director led to the company becoming liquidated, and the director under question will be able to seek legal advice and fight the charges if they desire.
What Should I Do If I’m Being Investigated?
If your company has entered into insolvency and is being investigated during insolvency proceedings, then the director needs to comply fully with any investigation. You need to respond in a timely and efficient manner to any correspondence and help the investigators wherever possible.
Failure to do this can work against you as a director and help to prove that you have been running the company while ‘unfit’. If you know your company is facing insolvency then you should contact a registered insolvency practitioner before this happens. You can then be ready to face an investigation if necessary.
Remember that even if you are being investigated, it doesn’t mean you will be disqualified. It’s rare for a director to be disqualified, especially if they have not deliberately or illegally committed any actions that would be deemed ‘unfit’.
If you have run the company to the best of your ability, kept stringent records and reports, and always paid your taxes and filed your accounts, then the investigation will often end up in your favour.
If you have any reason to, you should fight any rulings in court with appropriate legal counsel on your side, before accepting a disqualification.
What Happens If a Director’s Conduct Is Found to Be ‘Unfit’ According to the Company Directors Disqualification Act?
If a director is found to be ‘unfit’ according to the CDDA, they will be subject to disqualification for a maximum of 15 years. The total disqualification period will be determined in the courts, and will usually be related to how ‘unfit’ the director’s actions were.
Illegal or fraudulent action is likely to be more severely punished in this respect than incompetency or sheer bad luck would be. If a director receives a disqualification notice, then their name will be listed on the Companies House Register and they will be unable to direct or manage a company for the duration of the ban.
A disqualified director will also be banned from employing another individual to run a company on their behalf. They won’t be able to participate in many other positions in society either, and will be banned from being on the board of a charity or school, for instance.
If they decide to break the disqualification and begin running a company, then the person can be prosecuted and could end up facing a prison sentence for breaking the law. For that reason, it’s important to be aware of what you can and can’t do if you receive a disqualification. Again, seeking legal advice is the best option in this scenario.
Always Seek Legal Advice from an Expert Insolvency Practitioner
Remember, there are many avenues open to a company facing financial difficulties. There are always ways back from the brink, especially with the help of an experienced insolvency practitioner. Whatever your situation might be, always contact independent counsel before taking any actions, because there could another option that can help your company avoid insolvency or liquidation entirely.
Irwin Insolvency offers expert advice for company directors who might be facing insolvency. If you need help with your company finances or are facing disqualification, then don’t hesitate to get in touch with our dedicated team today.
We have years of experience working in the insolvency sector across a range of industries, and are ready to help you through these trying times. Contact Irwin Insolvency today, for your free consultation.